The Financial Supervisory Service said Wednesday that Hyundai Merchant had inflated 2000 net profit by 1.2 trillion won ($1.13 billion) through misstating sales and costs. It also cited other accounting violations of about 180 billion won.

A Hyundai Merchant spokesman said the company would give a reaction to the situation next week.

"We are not in a position to say anything until final details are disclosed next week, but we believe the experience will help us become a more transparent company," said a Hyundai Merchant spokesman.

The violations, referred to as fraud by FSS officials, have revived fears among investors that the breach of accounting rules in South Korea could be widespread.

Analysts point to South Korea's patchy corporate governance record and unusual management practices to explain why the country's stock market trades at a substantial discount to those of its Asian neighbors.

South Korea's benchmark index has the lowest price-earnings ratio of Asia's major markets at seven times for the current year, against 30 times for Japan's Nikkei 225 Stock Average, 15 times for Hong Kong's Hang Seng Index and 10 times for the Taiwan weighted index, according to Reuters data.

A number of top companies, including
Kookmin Bank
and Hynix Semiconductor Inc., have faced similar problems this year.

The regulators said a review committee including outside auditors were to have met Thursday to go over the violations and a panel in charge of securities regulations would confirm the details of the accounting fraud and the punishment this coming Wednesday.

Shares in Hyundai Merchant -- in which Hyundai companies and founding family members own 21% and Hong Kong-based
Hutchison Whampoa Ltd.
owns 12% -- fell 2.1%, or 300 won, to 14,300 won Thursday, after having fallen intraday by as much as 9.6%.

"The accounting fraud was quite a bit bigger than the market had been expecting, and prices are likely to remain very weak for a while," said Kim Joong Hyun, an analyst at Goodmorning Shinhan Securities. "There is a lot of uncertainty on what kind of punishment will be given to Hyundai Merchant, and how severe that would be."

Financial authorities have been studying Hyundai Merchant's accounting records for 2000-2003 after the company said in March it had found an accounting error of 622.4 billion won in its 2003 financial statement and had corrected it.

"If the punishment is severe, we believe it could have an impact on the company's future business performances," LG Investment & Securities, which cut Hyundai's rating to "neutral" from "buy" on Thursday, said in a note to clients.

Hyundai Merchant is expected to post a net profit of 325.1 billion won in 2004, reversing a loss of 20.9 billion in 2003, according to Reuters Estimates, thanks to rising shipping demand.

In September, Hynix Semiconductor was fined two billion won after it was found to have broken accounting rules between 1999 and 2003.